Perquisites and Profits in Lieu of Salary are important components of taxable income under the Income Tax Act of 1961. These refer to additional financial benefits, compensations, or payments that an employer provides to employees beyond their regular salary or wages. They are considered part of the employee’s income and are therefore subject to taxation.
As per section 17(2) of Income Tax Act
Perquisites are any casual incomes or benefits provided to an employee in addition to their salary or wages. They can be provided in cash or in kind. Any reimbursements offered by the employer do not form part of the perquisites. The type of perquisites are (i) taxable (ii) non-taxable
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Types of Non-Taxable Perquisites
Non-Taxable Perquisites are benefits or amenities provided by an employer to an employee that are specifically exempt from taxation under the Income Tax Act, 1961. These perquisites are either fully or partially exempted from being tax based on specific conditions under the Income Tax Act.
While they are still perquisites they are still taxable and the value can be calculated through this way for
i. Rent-Free or Concessional Accommodation:
- City of residence
- Monthly rent paid by the employer
- Employee’s basic salary, dearness allowance, and any commission
ii. Medical Facilities-treatment in employer-maintained hospitals (including government hospitals) is tax-free and it falls under Reimbursement of medical expenses for treatment abroad is tax-free up to certain limits if prescribed conditions are met.
iii. Health Insurance Premiums: Premiums paid by the employer for group health insurance policies covering employees and their family members are exempt from tax.
iv. Laptops and Mobile Phones: Employer-provided laptops and mobile phones (even if used for personal purposes) are tax-free.
vi. Contribution to Provident Fund
Employer contributions to Recognised Provident Fund (RPF) and Public Provident Fund (PPF) within prescribed limits are exempt from tax.
vi. Superannuation Fund
Employer contributions up to ₹1.5 lakh per annum to an approved superannuation fund are tax-free.
vii. Leave Travel Allowance (LTA)
Exempt for travel expenses incurred within India for the employee and their family, subject to specific conditions (twice in a block of four years).
Taxable Perquisites
Taxable perquisites are those benefits provided by an employer that are subject to income tax as part of the employee’s salary. Below are the most common taxable perquisites as per the Income Tax Act, 1961:
i. Rent-Free or Concessional Accommodation
Owned by Employer: Taxable based on the city of residence (15% of salary for metro cities, 10% for others).
ii. Use of Employer’s Car
Fuel and maintenance expenses paid by the employer add additional taxable value.
iii. Interest-Free or Concessional Loans
Taxable perquisite is the difference between the interest charged by the employer (if any) and the SBI lending rate.Exemption for small loans up to ₹20,000.
Profits in Lieu of Salary (Section 17(3))
According to this section are considered to be payments made to the employee by the employer in addition to their regular salary or wages.
Profits in lieu of salary taxed in India are are taxed as per the slab rates applicable to the employee’s total income. These may vary as per the nature of the payment
The income which is considered profits in lieu of salary are compensation for termination of employment.
Profits in lieu of salary include:
Compensation for termination of employment payments received upon resignation, dismissal, or termination of employment. More to that involuntary retirement scheme (VRS) compensation (except exempt portions under Section 10(10C)) are part of profits in lieu of salary.
Secondly there will be compensation for modification of employment terms thus if any payment received due to changes in employment terms, such as reduction in rank or benefits will apply.Payment from an employer or a third party if payment received from the employer or a person connected to the employer in connection with employment.Keyman insurance policy proceeds is amount received by an employee or legal heir from a Key-man Insurance Policy, which is taken by the employer on the life of the employee.
Lastly payments received after cessation of employment any sum received after leaving the job but linked to past services, such as deferred bonuses or gratuity beyond exempt limits.
Profits in lieu of salary taxed under the head ‘Salaries’
Firstly are those received before joining or after termination of employment , payments received by an employee before officially joining or after the termination of employment can be considered under this category. Such payments could include signing bonuses, severance packages, or other compensations therefore these payments are considered profits in lieu of salary and are subject to tax under the head “Income from Salaries.”
To second that any other amounts received from the employer which includes any additional amounts received by an employee from their employer, either voluntarily or due to a legal obligation, which are not part of the regular salary or wages.
Key Exemptions and Deductions
While Profits in Lieu of Salary are generally taxable, there are some exceptions and relief options available:
(i) Gratuity Exemption section 10(10)if an employee receives gratuity, a part of it may be tax-exempt, depending on factors like tenure and employer type.
(ii) Leave Encashment section 10(10AA)this is when employees encash unused leave upon retirement or resignation, they may be eligible for partial or full tax exemption based on employment status (government vs. private sector).
(ii) Voluntary Retirement Scheme (VRS) Benefits section 10(10C) VRS payments up to ₹5,00,000 can be tax-free if they meet specified conditions.
Difference between Salary, Perquisites, and Profits in Lieu of Salary
| Salary | Perquisites | Profits in lieu of salary | |
| Definition | A regular payment made to an employee for their work or services. | Benefits or amenities provided to employees in addition to their salary. | Payments made to employees in lieu of salary, often in the form of a share of profits. |
| Taxation | Taxed as income under the head “Salaries”. | Taxed as income under the head “Salaries”, but some perks may be exempt or partially exempt. | Taxed as income under the head “Salaries” or “Business or Profession”, depending on the nature of the payment. |
| Examples | Basic salary, allowances, and deductions. | Company car, phone, accommodation, club memberships, and travel expenses. | Bonus, commission, or profit-sharing arrangements |
Conclusion
Perquisites and Profits in Lieu of Salary are key components of taxable income under the Income Tax Act, 1961. They represent additional financial benefits, compensations, or payments beyond an employee’s basic salary and are subject to taxation based on specific.Perquisites refer to extra benefits provided by an employer to an employee, either in cash or kind. They do not include reimbursements but are categorised into taxable perquisites, benefits such as rent-free accommodation, company cars, or stock options that are subject to tax.Non-Taxable Perquisites like employer contributions to provident funds or medical benefits up to specified limits, are exempt from tax under specific conditions.Profits in Lieu of Salary include payments received instead of salary and are taxed as salary income. These payments may arise Profits in lieu of salary are taxed at the employee’s applicable income tax slab rates. While some components, like gratuity and leave encashment, may have partial exemptions, others are fully taxable.Understanding the distinction between Perquisites and Profits in Lieu of Salary is essential for both employees and employers to ensure accurate tax compliance and effective financial planning. By leveraging exemptions and planning compensation structures wisely, individuals can manage their tax liabilities more efficiently.
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